Let’s suppose you are a European bank having funding problems. But the ECB is trying to wean banks off of emergency funding.
You borrow 16 bln euros from the ECB and then you look for other avenues…
Look! Cheap dollars to be had in the States!
You borrow some greenbacks, but your exposure is in euros. Normally, you’d just do a swap to match up your maturities but since the credit markets are tight, you have to buy the euros outright.
If your funding crisis is this acute, the FX risk is not much of a factor in your thinking. You may be on deaths door already…
A plausible theory, totally of my own imagination . I have no evidence that is what is taking place, other than this piece on ZH...
Come to think of it, that is exactly what happened back in the fall of 2008 when the credit markets seized up. Institutions that were unable to borrow dollars ended up buying them in the FX market driving the dollar higher despite a historic financial sector meltdown…Stranger things have happened.
